White House pushes surprise Fannie, Freddie reform plan, but is it workable?

WASHINGTON — The Trump administration proposed Thursday to rip off the Band-Aid from Fannie Mae and Freddie Mac, ending conservatorship of the mortgage giants and leaving them to raise their own capital in the private market. But the plan raises a whole host of questions and left many wondering whether it could advance.

Included as part of an Office of Management and Budget plan for reorganizing the government, the housing finance reform proposal would appear to require both legislative and administrative action, such as creating an explicit government guarantee for mortgage-backed securities for “limited, exigent circumstances.”

“There are large hurdles on both sides to getting this passed from a vote count perspective,” said Rob Zimmer, head of external communications for the Community Mortgage Lenders of America.

The plan would overhaul the mortgage finance system and could signal a debate among White House officials over who should head the Federal Housing Finance Agency starting next year.

Bloomberg News

The plan calls for reducing the footprint of the government-sponsored enterprises in the housing market. Fannie and Freddie would be converted into “fully private entities.” The housing giants could access the explicit federal guarantee, but so could other market entrants.

Both GSEs would lose their federal charters. A federal regulator would oversee the “fully privatized GSEs,” approve the creation of new guarantors and “develop a regulatory environment that is conducive to … competition.”

“If the GSEs lost some of the benefits that have led them to dominate the market, this would enable other private companies to begin competing in this space,” the OMB plan said. “The regulator would also ensure fair access to the secondary market for all market participants, including community financial institutions and small lenders.”

But the plan developed by OMB Director Mick Mulvaney — who is also the acting director of the Consumer Financial Protection Bureau — immediately produced skepticism.

Jaret Seiberg, an analyst at Cowen Washington Research Group, said it was not even clear if the plan had support elsewhere in the administration, such as from the Treasury Department or the Department of Housing and Urban Development. He also speculated that the GSE portion of the reorganization may have been written by Kathy Kraninger, an OMB deputy who is also the nominee to become permanent CFPB director.

“We do not believe that the OMB proposal enjoys much support within government. It is interesting that it came out without direct expressions of support of Treasury or HUD, both of which are major players within this White House on housing policy,” Seiberg said in a research note.

He added that the report could indicate a debate within the administration over who should run the Federal Housing Finance Agency, which now oversees the GSE conservatorships, after the Obama-appointed Director Mel Watt steps down in January.

“There was no need to include Fannie/Freddie reform as part of this document, which really focused on other programs. That Mulvaney waded into an issue that Treasury was in charge of indicates to us the growing power and influence that he has within the Trump White House,” Seiberg wrote. “To us, that matters because the White House will need to nominate an FHFA director in January when Mel Watt’s term expires. We believe Mulvaney would seek a conservative who wants to reduce the government’s role in housing while Treasury Secretary Steve Mnuchin is more likely to support a candidate who sees value in the current system.”

Under the proposal, the new regulator would charge fees to guarantors to create a new insurance fund. “The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure,” OMB said.

Zimmer said a greater number of guarantors in the market would pose challenges for smaller lenders.

“They don’t have time and staff to figure out new systems, new put-back policy, new rules, because every guarantor is somewhat different from each other, even today with Freddie and Fannie,” he said.

Ron Haynie, a senior vice president at the Independent Community Bankers of America, said the group is “encouraged” that the administration wants to end the conservatorships and recapitalize the GSEs, but raised additional concerns about a multiple-guarantor model.

“We just think that the competition should occur in the primary market, not necessarily in the secondary market where players have access to a government guarantee,” he said.

The proposal would position HUD to oversee affordable housing objectives, and “the newly fully-privatized GSEs would have mandates focused on defining the appropriate lending markets served in order to level the playing field with the private sector and avoid unnecessary cross-subsidization.”

Fees on MBS issued by guarantors would go toward affordable housing goals administered by HUD through the Federal Housing Administration.

“The proposal would be designed so that the affordable housing fees transferred to HUD would enable FHA to provide more targeted subsidies to low- and moderate-income homebuyers while maintaining responsible and sustainable support for homeownership and wealth-building,” OMB said.

But Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, blasted the proposal over the changes to affordable housing.

“By eliminating affordable housing goals from the conventional mortgage market, lenders can choose to loan only to the well-heeled rich and ignore everybody still working their way up the economic ladder,” he said in a press release.

Debate over what to do with the GSEs is expected to pick up next year, as Treasury Secretary Steven Mnuchin has signaled that he plans to turn to the issue in 2019. Whether Treasury backs something similar to the OMB plan or adopts a different strategy remains to be seen.

Either way, after nearly a decade of debate on the future of Fannie and Freddie, the administration has a tough road ahead.

“One of the things that’s really hard to do here is trying to make these changes and create a new system, if you will, without destroying the liquidity that’s out there today with the existing system, and so we’ll have to see how this will all play out,” ICBA’s Haynie said. “I’m not saying it can’t happen, but it is a heavy lift no matter what.”